3 Things To Know About Due Diligence When Selling Your MSP

This article was written by guest contributor Reed Warren, CEO of iTValuations, which offers business valuation services as well as sell-side and buy-side advisory services.

Many MSP owners who plan to sell their business find the due diligence process intimidating; it’s easy to feel like your potential buyer is looking to catch the smallest mistake. But there are a few things you can do that will make the transaction process easier—some of which you can prepare for years in advance of a sale. Here’s a rundown of what to expect.

It Starts Before The Letter Of Intent (LOI)

The sale preparation process should begin well before you start looking for a buyer for your MSP business. It begins with knowing your objectives for the transaction.

At this stage in the pre-sale process, you should consider the following:

  • Who do you want to partner with?
  • What is your personal wealth target?
  • What are your must-haves and what are your nice-to-haves?
  • What is your exit strategy, and how long do you want to be involved post-transaction?

Determining these things in advance will provide clarity for you and the buyer, helping to ensure a great fit. At iTValuations, we have a success rate of over 98% once we get to the LOI stage, and we believe our process of walking potential sellers through this exercise is why—it clarifies transaction objectives and helps them remain focused on their ultimate goals.

The next step is to prepare the initial due diligence items. Every buyer has a different list and a different process. But, in general, there is a chunk of data that you’re going to need to provide, no matter who you are and no matter what buyer you go forward with. Most often, buyers will want five years of income statements, balance sheets, along with customer contracts and prepaid agreements. Begin now by organizing a data room and populating it with these pieces of information. It will reduce tension and stress during the early days of due diligence.

Once you get to the LOI stage, you’ll be ahead of the game—and a few steps ahead of your buyer and their review process.

Get Organized Before The Sale

Many sellers find themselves scrambling to get all the necessary documentation organized during the sale process. If you don’t want to disclose to your staff that you’re selling until the final stages of the sale, it can be inconvenient to go to employees to ask where files are stored. To avoid this situation, create an organizational system you understand and train your team in advance on how you want things organized.

This approach puts less strain on your team when it comes time to sell—and you avoid unwanted questions. Some MSP sellers don’t loop their team into the sale until weeks before or, in some cases, months post-transaction. By organizing in advance, you can inform key employees at the appropriate time.

Finally, hiring outside professional help can make the organizational process easier. Although you likely have a CPA you’ve worked closely with for years, getting another opinion can provide a different perspective or allow you to hear from someone with a different specialization, such as tax advantages in a sale. Consider speaking with different subject matter experts in legal, tax, and M&A prior to heading to market.

The Purpose Of A Buyer’s Due Diligence

Due diligence isn’t intended to catch you making a mistake. Due diligence is about verifying that what the buyer believes to be true about the business is indeed true. It’s about going from good faith to good fact.

Bear in mind that as part of the due diligence process, the buyer will come back with numerous follow-up questions. From the day that a buyer engages, they’re spending money to get the deal closed; everyone who is involved post-LOI is on the same team, working toward a common goal.

When in doubt, go back to your “why”—why you wanted to sell in the first place. Use that to find your motivation during the difficult phases of the sales process.

Want more tips from experts who have been there before? Check out this advice for owners looking to sell their MSP.

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Author:

Reed Warren

Reed Warren is CEO of iTValuations, which is pioneering growth strategies for MSPs through its new Valuation as a Service (VaaS) solution.

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